Huntington Bancshares Q4 2022 Earnings Call Transcript

Key Takeaways

  • Huntington delivered record earnings with Q4 GAAP net income of $645 million (adjusted $657 million) and full-year GAAP net income of $2.2 billion (adjusted $2.3 billion).
  • The company achieved its fourth consecutive quarter of record pre-provision net revenue, 10% year-over-year loan growth ex-PPP, and multiple quarters of deposit expansion, driving top-tier returns and CET1 capital in the mid-9% to 10% range.
  • Net interest margin expanded by 10 basis points sequentially, fueled by earning asset growth and a proactive hedging program (fixed-rate swaps and swaptions) to lock in spreads amid rising rates.
  • Credit quality remains strong with net charge-offs at 17 basis points, NPAs down to 50 basis points, and an allowance coverage ratio of 1.9% of total loans, reflecting disciplined underwriting entering a mild recession.
  • For 2023, Huntington targets 5–7% average loan growth, 1–4% deposit growth, 8–11% net interest income growth, flat noninterest income, 2–4% core expense growth (plus strategic efficiency actions), low-end net charge-offs of 25–45 bp, and plans to resume share repurchases in H2.
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Earnings Conference Call
Huntington Bancshares Q4 2022
00:00 / 00:00

There are 11 speakers on the call.

Operator

Welcome to Huntington Bancshares 4th Quarter Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. At this time, I would now like to turn the conference over to your host, Tim Sedabres, Director of Investor Relations.

Speaker 1

Thank you, operator. Welcome everyone and good morning. Copies of the slides we will be reviewing today can be found on the Investor Relations section of our website at www.huntington.com. As a reminder, this call is being recorded and a replay will be available starting about 1 hour from the close of the call. Our presenters today are Steve Steinar, Chairman, President and CEO Zack Wasserman, Chief Financial Officer Rich Polley, Chief Credit Officer will join us for the Q and A.

Speaker 1

Earnings documents, which include our forward looking statements disclaimer and non GAAP information are available on the Investor Relations section of our website. With that, let me now turn it over to Steve.

Speaker 2

Thanks, Tim. Good morning, everyone, and welcome. Thank you for joining the call today. We are very pleased to announce our 4th quarter results, which include GAAP net income of $645,000,000 And adjusted net income of $657,000,000 For the full year, reported GAAP net income was $2,200,000,000 And adjusted net income was $2,300,000,000 Both results reflect record earnings for Huntington. 2022 marked a year of numerous successes, driven by our team's execution of organic growth initiatives, realization of both expense and revenue synergies from the TCF acquisition and unwavering focus on credit discipline And proactive balance sheet management.

Speaker 2

We ended the year with substantial momentum. Clearly, the economic environment is becoming increasingly challenging. However, Huntington is better positioned today than at any time since I joined over a dozen years ago. And over those years, we've transformed the risk profile of the bank and remained highly disciplined. We are taking proactive steps now to again position Huntington to outperform and we enter the year with solid capital levels, top tier reserves, A growing core deposit base and strong credit metrics.

Speaker 2

We continue to see opportunities to grow revenue and profit. Now on to Slide 4. First, we finished the year with our 4th consecutive quarter of record pre provision net revenue. This was supported by higher interest income driven by earning asset growth and an expanded net interest margin. Revenue growth has been exceptional over the course of the year and we intend to protect and grow that revenue base.

Speaker 2

2nd, We delivered broad based loan growth ex PPP of 10% year over year. As we drove this growth, we also optimized for return while still exceeding our loan growth outlook. One example of this optimization is indirect auto, where our production in the quarter was Approximately 15% lower than the prior quarter, while our new loan yields increased by over 100 basis points. Importantly, we continue to grow our deposit base with multiple consecutive quarters of growth. We believe this is a differentiator for Huntington in this environment.

Speaker 2

It also demonstrates the breadth of our franchise and our colleagues' ability to acquire and deepen primary bank customer relationships. 3rd, our financial results for the Q4 and full year reflect the top tier return profile and were at or above our medium term targets. These results demonstrate the earnings power of the company and we expect to continue to deliver on these targets. As we intended, we delivered common Equity Tier 1 capital to the middle of our 9% to 10% operating range. We are also very pleased to announce a new 2 year Share repurchase program.

Speaker 2

4th, we ended 'twenty two with strong momentum across the business that we carry into this new year. We remain focused on growth aligned with our risk appetite. Importantly, we have the capital, credit reserves and strength of balance sheet that give us confidence to continue to deliver on our organic growth priorities. Slide 5 highlights the tremendous earnings power of the franchise, which has improved sequentially over the course of the year. PPNR is over 60% higher than pre pandemic levels.

Speaker 2

Our return on tangible common equity is top tier. We managed our asset sensitivity throughout the year and deliberately positioned the company to benefit from higher interest rates, which resulted in significant revenue growth. We've also been prudent in taking actions to protect this revenue base should we experience lower rates over the next few years. We will continue to be dynamic in this regard with our goal of reducing volatility and creating a tight corridor around the path of spread revenue. At our Investor Day in November, we shared with you our highly defined set of strategic priorities.

Speaker 2

We expect these strategies will drive sustained revenue growth and support gains in efficiency over the long term. As you also heard, This management team is a group of experienced operators. To further accelerate the execution of these strategies and support increased efficiency, we will be taking series of actions during 2023 to align our organizational structure with a focus on our critical priorities. We expect these actions will result in new growth and efficiency opportunities. We will share more details on these actions as they're finalized over the course of the Q1.

Speaker 2

However, one element will be a voluntary retirement program for our middle and senior management. Overall, I believe this program Will be important to support our colleagues and create value for our shareholders. In closing, we are well positioned for continued growth. We have the strategies, the momentum in our businesses to support growth. We also benefit from highly engaged colleagues who've consistently delivered outstanding customer service and are a true differentiator.

Speaker 2

We have the credit discipline to outperform and remain focused on rigorous expense management, investment prioritization and capital allocation. We remain committed to our long track record of managing to positive annual operating leverage and are intently focused on driving shareholder value. Zach, over to you to provide more detail on our financial performance.

Speaker 3

Thanks, Steve, and good morning, everyone. Slide 6 provides highlights of our 4th quarter results. We reported GAAP earnings per common share of $0.42 And adjusted EPS was $0.43 Return on tangible common equity or ROTCE Came in at 26% for the quarter. Adjusted for notable items, ROTCE was 26.5%. Further adjusting for AOCI, ROTCE was 19.8%.

Speaker 3

Loan balances continued to expand As total loans increased by $1,900,000,000 and excluding PPP increased by $2,100,000,000 Deposit balances Increased by $1,600,000,000 on an end of period basis, while average deposits were essentially flat compared to the prior quarter. Pre provision net revenue expanded sequentially by 4.2% from last quarter to $893,000,000 And on a full year basis, year over year increased by 36% to $3,200,000,000 Credit quality remains strong with net charge offs of 17 basis points and non performing assets declining to 50 basis points. Turning to slide 7, Average loan balances increased 1.7% quarter over quarter driven by both commercial and consumer loans. Commercial loans continue to represent the majority of loan growth. Within commercial, excluding PPP, Average loans increased by $1,900,000,000 or 2.7 percent from the prior quarter.

Speaker 3

Primary components of this commercial growth included Distribution finance which increased $900,000,000 tied to continued normalization of dealer inventory levels as well as seasonality with shipments of winter equipment arriving to dealers. We also saw the continued long term trend of demand within our asset finance businesses which drove balances $300,000,000 higher in the quarter. Commercial real estate balances increased by $500,000,000 Largely as a result of production late in Q3 and lower prepays. End of period balances were higher by $180,000,000 Auto floor plan utilization continued to normalize which drove balances higher by $300,000,000 Additional increases in line utilization over time represents a substantial ongoing opportunity. We also saw higher balances in specialty verticals such as mid corporate and tech and telecom, which were offset by lower balances in other areas as a result of our return optimization initiatives.

Speaker 3

In consumer, growth was led by residential mortgage, which increased by $500,000,000 As on sheet production outpaced runoff and was supported by slower prepaid speeds. Partially offsetting this growth Where lower auto balances which declined by $230,000,000 and RV Marine which declined by $50,000,000 Turning to slide 8, we delivered $1,600,000,000 of deposit growth for the quarter and $4,600,000,000 for the year on an ending basis. On an average basis, deposits were lower by 2 tenths of 1%, while increasing 2.4% year over year. Competition for deposits has intensified beginning in earnest in September and continuing into the 4th quarter. Notwithstanding that, we are pleased with the traction we saw over the course of the quarter as our teams delivered robust production demonstrating the deposit gathering capabilities across the bank.

Speaker 3

Ending deposit growth was led by consumer which increased by $1,600,000,000 We saw a mix shift in line with our expectations including incremental growth in both money market and time deposits. We continue to remain disciplined on deposit pricing with our total cost of deposits coming in at 64 basis points for the 4th quarter. We will remain dynamic balancing core deposit growth, the competitive rate environment and the utilization of a broad range of funding options. On slide 9, we reported another quarter of sequential expansion of both net interest income and NIM. Core net interest income excluding PPP and purchase accounting accretion increased by $67,000,000 or 5% to $1,459,000,000 Net interest margin expanded 10 basis points on a GAAP basis from the prior quarter and expand 11 basis points on a core basis excluding accretion.

Speaker 3

Slide 10 highlights our high quality deposit base and diversified funding profile. For the current cycle to date, our beta on total cost of deposits was 17%. As we have noted, we expect deposit rates to continue to trend higher from here over the course of the rate cycle. Overall, Our beta continues to track to our expectations. Turning to slide 11, throughout 2022 We were deliberate in managing the balance sheet to benefit from asset sensitivity.

Speaker 3

We also incrementally added to our hedging program to manage possible downside rate risks over the longer term. During the quarter, we executed a net $3,200,000,000 of received fixed swaps And $800,000,000 of forward starting swaption callers. At this point, based on the current rate outlook and yield curve opportunities, We believe we have optimized the size of the program. We are comfortable with our position today as we balance near term costs versus longer term protection. As always, we will be dynamic as we monitor the outlook and the yield curve.

Speaker 3

We maintain unused hedge capacity that we could deploy Should the curve revert and or steepen to a level where we would add incremental downside rate protection hedges. On the securities portfolio, we saw another step up in reported yields quarter over quarter. We are benefiting from reinvestment as well as the hedge strategy to protect capital. We will continue to reinvest cash flows of approximately $1,000,000,000 each quarter at attractive new purchase yields around 5%. Moving to Slide 12, non interest income was $499,000,000 up $1,000,000 from last quarter.

Speaker 3

We drove record activity within our Capital Markets businesses during the quarter and throughout 2022. KapStone continued to perform well and our underlying capital markets businesses outside of KapStone finished the year strong, up 26% year over year. We remain pleased with the client engagement we are seeing in the Wealth Management business with another positive quarter of net asset flows. On a year over year basis, we saw lower mortgage banking income as a result of the higher rate environment and from lower deposit service charges from fair play enhancements we implemented during 2022. Offsetting these factors or higher capital markets revenues and payments revenues.

Speaker 3

Importantly, we are executing on our strategy to drive higher value revenue streams and our fee mix continues to trend favorably. Moving on to slide 13, GAAP non interest expense Increased $24,000,000 compared to the prior quarter. Adjusted for notable items, core expenses increased by $19,000,000 This quarterly increase in core expenses was primarily the result of revenue driven compensation tied to capital markets production. Additionally, we saw seasonally higher medical claims in the quarter which increased by $16,000,000 Underlying these results, core expenses were well controlled demonstrating our commitment to disciplined expense management. Slide 14 recaps our capital position.

Speaker 3

Common Equity Tier 1 increased to 9.44%. Our tangible common equity ratio or TCE increased to 5.55%. Adjusting for AOCI, Our TCE ratio was 7.3%. We ended the year having delivered on our plan to drive common equity Tier 1 to the middle of our 9% to 10% operating range. Going forward, our capital priorities have not changed.

Speaker 3

Fund organic growth, Support our dividend and provide capacity for all other uses including share repurchases. After having held back On share repurchases for the last several quarters, our expectation is that over the course of 2023 and beyond, We will now return to a more normalized capital distribution mix, including share repurchases. Our Board has authorized a $1,000,000,000 share repurchase program through the end of 2024. Given the current economic outlook, our thinking is that we will not Actively repurchase shares during the first half of twenty twenty three as we watch the path of the economy. This may result in capital ratios continuing to expand in the near term.

Speaker 3

We like the flexibility the program provides and we believe it is prudent to maintain an authorized share repurchase program as part of our overall capital management framework. On slide 15, credit quality continues to perform very well. As mentioned, net charge offs were 17 basis points for the quarter. This was higher than last quarter by 2 basis points and up 5 basis points from the prior year As credit performance continues to normalize, non performing assets declined from the previous quarter and have reduced for 6 consecutive quarters. Criticized loans have similarly improved for 4 consecutive quarters.

Speaker 3

Allowance for credit losses was up slightly, Driving the coverage ratio higher to 1.9 percent of total loans. Turning to slide 16, you will note a strong reserve position. As I mentioned, the portfolio has continued to perform extraordinarily well and we believe our disciplined approach to credit through the cycle underpins the overall strength of our balance sheet. We were pleased to update our medium term financial targets at Investor Day in November And these form the foundation of our expectations over our strategic planning horizon. We believe these metrics are at the core of value creation, Profit growth, return on capital and the commitment to drive positive annual operating leverage.

Speaker 3

Turning to Slide 18, Let me share some thoughts on our 2023 outlook. As we discussed at Investor Day, we analyzed multiple potential economic scenarios to project financial performance and develop management action plans. Our targets are anchored on a baseline scenario that is informed by the consensus economic outlook and the forward yield curve as of December 31. The baseline assumes a mild recession in 2020 3. With modest net GDP growth for the full year, the economy is expected to exit the year on a path toward recovery with inflation gradually subsiding.

Speaker 3

Since Investor Day, the economic outlook is incrementally worse and is likely at the lower end of the baseline scenario outcomes. Our baseline outlook for 2023 is for average loans to grow between 5% and 7%, led by commercial with more modest growth in consumer. We will continue to focus on optimizing for returns and driving loan expansion in select areas. Deposits are expected to increase between 1% 4%, reflecting continued growth and deepening of customer and primary bank relationships. Net interest income is expected to increase between 8% and 11% driven by continued earning asset growth and expanded Full year net interest margin.

Speaker 3

Non interest income is projected to be approximately flat. We expect continued robust performance from our areas of strategic focus, capital markets, payments and wealth management. During 2023, Several other factors are offsetting that growth, including our anticipated holding of the majority of our SBA loan production on sheet, thereby reducing near term fee revenue in favor of longer term high return spread revenue. Lower income of approximately $23,000,000 associated with purchase accounting accretion in fees. Please refer to Slide 30 for more details.

Speaker 3

Lower operating lease revenue As we continue to transition to more capital leases, importantly we expect this will result in lower operating lease depreciation expense as well. Lower mortgage banking income for the full year 2023 versus 2022. And finally, in light of the economic outlook, We are implementing risk mitigating deposit policy changes that will result in a lower incidence of overdrafts and related service charges. In addition, we are reducing NSF fees to 0 in the Q1. This will result in an approximate $5,000,000 reduction in fee income per quarter, which we expect to be more than offset by lower associated charge offs.

Speaker 3

As you know the Q1 is generally a seasonal low for overall fee income. We expect fee income will grow sequentially throughout the remainder of the year. On expenses, as Steve noted, we intend to hold growth to a low level given the environment, even as we remain committed to funding critical long term investments. We plan to manage core underlying expense growth between 2% 4% for the full year. This level of expense growth benefits from the ongoing efficiency initiatives we've discussed previously, such as operation accelerate, branch optimization and the organizational alignment actions that Steve highlighted.

Speaker 3

Added to the core expense growth, we expect approximately $60,000,000 higher expenses from the full year run rate of Capstone and Toronto and $33,000,000 of increased FDIC insurance expense associated with the surcharge. In addition, we expect the first half of the year to include some amount of restructuring charges associated with the expense management actions we are taking. We will provide more details about these actions later in the quarter. Overall, our low expense growth coupled with expanded revenues is expected to support another year of positive operating leverage. We expect net charge offs will be on the low end of our long term through the cycle range of 25 to 45 basis points.

Speaker 3

Our 2023 guidance reflects the current macroeconomic outlook. We will continue to be diligent in analyzing the macro environment and we will react as needed to manage as the year plays out. We ended 2022 in a position of strength

Speaker 4

and have good momentum. We have

Speaker 3

every expectation of continuing to outperform this year. With that, we will conclude our prepared remarks and move to questions and answers. Tim, over to you.

Speaker 5

Thank

Speaker 1

you, Zach. Operator, we will now take questions. We ask that as a courtesy to your peers, each person ask only one question and one related follow-up. And then if that person has additional questions,

Operator

Thank you. Our first question is from the line of Manan Shmi Manan Gosalia with Morgan Stanley.

Speaker 5

And we can see from the CD rates that you're offering the market that you've been proactively raising the CD rates and offering more 14 month CDs. So just given all of that, can you talk about how much The projected deposit growth in 2023 will be driven by CDs and what the overall deposit mix is likely to look like?

Speaker 4

Sure. Yes, this is Zach. I'll take that question. Thank you for asking it. Generally speaking, we're seeing our deposit growth continue to trend pretty well in line with the outlook that we've given between 1% and 4% growth for the full year.

Speaker 4

So we think we're on that run rate.

Speaker 5

I I

Speaker 4

think it will be balanced between both consumer and commercial. And to your point, we'll continue to the mix of that deposit Gathering will continue to trend as we expected and is baked into our overall rate and beta expectations toward higher rate products, like Time deposits like money market, etcetera. I think we're beginning we're operating in this rate cycle Clearly, the lower level of mix of those products than we were, for example, in the last rate cycle. So we'll see that trend higher throughout the course of Several quarters, but in line with our general expectations, it all comes back to our focus of deepening relationships with our existing customers and our Primary bank relationships, and so we think it's working pretty well and expect it to continue to go up to 23.

Speaker 5

Got it. And then maybe on the NIM trajectory from here, can you comment on if we're close to peak? And given what you said on the hedges and the fact that you're through the program, at least for now, how should we think about a Floor for NIM from here over the course of the next 4 to 8 quarters if the Fed does start cutting rates? Thanks.

Speaker 4

Yes. On the topic of NIM, just take a step back, we've significantly benefited over the last three quarters from our Explicit actions to manage NIM and to manage asset sensitivity seem more than 60 basis points NIM expansion in the last 3 quarters alone and that was very intentional with the mind toward continuing our top tier performance in NIM over the course of one period As we stand now, as we start to look into 'twenty three, we do believe there's more room to go On asset betas, and we'll see yields continuing to increase out over the next few quarters. However, we're further along in that process, probably 3 quarters of the way through than we are on the deposit beta side. But we also expect, as we said, rates continue to track higher over the course of the Several quarters, probably only about halfway through the deposit beta cycle. And when you couple that dynamic with what

Speaker 5

is currently expectation in the

Speaker 4

yield curve that we'll see short end that we'll see short end rates fall toward the latter part of 2024, it is reasonable to project A somewhat downward trajectory of NIM over the course of 2023. Our goal will be to manage NIM as we've said On a number of occasions previously, within as tight a corridor in 2023 as we can, really protecting the downside With that hedging program and ultimately driving toward sequential and sustained growth in net interest income on a dollar And I think when we couple what we expect to be a pretty strong NIM level overall with the loan growth that we expect to continue to drive, again, to the guidance 5% to 7% over the course of this year. We'll see that NII dollar basis continue to expand, and so that's a definite focus.

Speaker 5

Great. Thank you.

Speaker 4

Thank you.

Operator

Our next question is from the line of Steven Alexopoulos with JPMorgan. Please proceed with your questions.

Speaker 6

Hey, good morning, everyone.

Speaker 4

Good morning, Steven. Good morning.

Speaker 6

I want to start, so to follow-up, Zach, with the NIM expected to trend down given all the hedges and protection you've put in place sort of tighten that band. And can you frame for us how much downside could we see? What's

Speaker 4

Yes. Thanks, Stephen, for the question. Look, I think the trend is something on the order of single digits reduction on a kind of a quarterly basis As we go throughout 2023, there's a range of uncertainty. So I want to be clear, not being overly precise. You just think about all factors that are going to play into that.

Speaker 4

The Fed funds actions, which as you know from starting at the dot plots Are not aligned with the market expectations. So how that all plays out, I think it's going to be the most important factor. The pace of and trajectory of beta, Which at this point seems to be fairly well linear across time, but we'll have to wait and see how that goes. And Included, the big one is the economy and where that tracks over the near term. And so It's difficult to be overly precise, so I'm trying not to and bring back to dollar.

Speaker 4

Our goal will be to drive NII on a dollar basis. As I said, I do expect some downward trajectory in NIM and probably something on the order of single digits on a sequential basis

Speaker 6

Got it. That's helpful. And then, Zach, when we look at you're obviously expecting more loan growth than deposit growth, Fairly large issuance of sub debt this quarter. Could you walk us through the funding strategy? I know you said you expect overall growth in average But what's the funding strategy?

Speaker 6

It seems like you have to do much more than just on the deposit side. And maybe what will be the cost of that? Thanks.

Speaker 4

Yes. No, it's an important point and it's something that we feel is a point of strength and an advantage at this point in the cycle given that we're coming to the early to middle stages of the cycle, that's still a very advantageous Overall position in terms of loan to deposit ratio, the mix of important categories of deposits like time deposits and our non customer funding kind of Relative to history, so it allows us, as I've mentioned on a number of previous occasions, to utilize a balanced source of funding. If you look back at what happened in 2022, we grew loans at 10%, deposits were more in the 2.5% range. Clearly, loan deposit ratios have tracked up, and we used a broad range of other funding sources like long term debt, like the FHLB and other non customer sources to balance out. The same is going to be true for 2023, albeit to a somewhat less degree, think about loan growth in that mid- to high single digits range, 5% to 7%, deposit growth in the 1% to 4 It does imply we'll continue to see loan to deposit ratios tick up and you'll see us therefore continue to utilize other Balance funding sources like the Federal Home Loan Bank, other non customer sources of funding there.

Speaker 4

The rates that we're seeing Are pretty reasonable and the incremental economics on that loan growth continue to be very accretive to return on capital And the overall costs of deposits and funding within that beta expectation or sorry, with that NIM expectation that

Operator

Our next question is from the line of Ken Usdin with Jefferies. Please proceed with your question.

Speaker 4

Hey, good morning. Hey, Zach, I wanted to ask you, I know we talked about this last quarter, the security swaps that you had added a nice amount of net Interest income again. And I'm just wondering, can you help us understand just the benefit from that, if ineffectiveness helped that again? And just how does that So, like, how do we track that going forward relative to just interest rates in terms of the benefits that you should get from there? Yes.

Speaker 4

They were a very powerful benefit. I think it's they protected, as you know, about a third of what would have otherwise been AOC line mark reduction, which was their primary attention originally, but also has played out in terms of really strong reported yields in the securities portfolio. Roughly half of the approximately 50 bps increase in securities yields was from that hedging program to give you a sense of the scale. And I think Where it goes from here in terms of incremental benefit is going to be to some degree of function just where that Mid portion of the curve goes and at this point it's fairly well topped out. I'm not expecting a ton more lift there.

Speaker 4

The lift from that has It was somewhat from the Q3, but it still is very accretive. We're not adding to that portfolio now. And so I think No, we're getting the benefits that we expected from it. Okay, great. And then one follow-up on deposit beta, 17% total Key motives so far through the cycle, can you just remind us what you're thinking about betas from here and just be super clear for us if you don't mind on I think you guys Usually do talk on total?

Speaker 4

Yes, sure. So it was 17%. To give you a sense just kind of tracking across time, It was 6% in Q2, 11% in Q3, 17% in Q4. So continues to track and kind of in that Additional 5% to 6% to 7% range each quarter. And the expectation is to go out into Q1, it's going to be some More of the same continuing out over until we get into the middle part of the year.

Speaker 4

Our planning assumption, Ken, is It's something on the order of 35% total made up through the cycle, which would indicate we're about halfway through to the prior Point that I made, with that being said, I'll tell you where we're intently focused is on the day to day management of this And really very, very rigorous looking client by client in the commercial portfolio, geography by geography In the consumer portfolio and ensuring that we can stay competitive and ensure that we've got a strong deposit franchise. And We'll continue to wait and see and manage against that. If the outlook changes, we'll let you know. But at this point, it continues to track according

Speaker 7

to that broad

Speaker 4

Okay, great. Thank you, Zach. Thank you.

Operator

Our next question is from the line of Erika Najarian with UBS. Please proceed with your questions.

Speaker 8

Hi, good morning. I wanted to switch to good morning. You mentioned on Slide 18 that you expect to be at the low end of your net charge off range. The tone very quickly changed this week from soft landing to hard landing. I guess my question here is, this may be obvious to that have covered the company for a while, but what makes you confident despite the deteriorating Economic outlook that you could stay at the low end of that already pretty low range.

Speaker 8

And given some There was a I wouldn't call them up here, but there was a company that reported pretty eye popping delinquency numbers in auto this morning. I'm wondering if you could give us what's going on with auto credit trends underneath. And again, re remind Why you feel confident about how that portfolio would perform in an economic downturn?

Speaker 4

Hey, Eric, it's Rich. Let me take that. I'll go with I'll answer Your second question first with respect to auto. So we are seeing delinquencies in our portfolio. And again, remember, this is a And as we talked about at Investor Day, we've been in this business for decades and we've got very Sophisticated custom scorecards that we use in our client selection process.

Speaker 4

So we feel very good about where this business today and it's been through numerous cycles and it's proven itself that it can outperform peers from a lost content through various cycles. So we feel good about that. The delinquencies right now are right where we would expect them to be from a seasonal standpoint. If you go back and you look at where delinquencies Would have been in that 2018 2019 area. We're still trending below those pre COVID levels.

Speaker 4

We feel good there. And we've been very proactive as it relates to how we're managing our limited values in space as well. So I don't have any real concerns about our indirect auto space. I feel very comfortable with how that business is running. With respect to the overall comfort that we have in our net charge off forecast, I think it goes back to our customer makeup.

Speaker 4

Again, as I talked about at Investor Day, on the consumer side, we are overwhelmingly a secured creditor. 95% All our loans are secured. And again, we've got that prime and super prime focus and high FIFO origination around $7.70 So it is a very strong book. And throughout all of that book, I know I just talked about auto, But even RV, marine, resi, all of those portfolios are showing very well from a delinquency standpoint. So we feel good there.

Speaker 4

On the commercial side, we have taken a lot of steps to reposition this book over the last several years, going through into more Specialty Business is more larger companies, public companies. So we feel that we've mitigated the lost And in that portfolio as well. So even though, as Zach pointed out, we're looking at more of a mild recession than a severe That's why we feel comfortable with where we are from a charge off forecast at that low end. Now clearly, If the economy worsens, where we land within that range is going to depend on where the economy goes and how the Fed reacts. But At this point, we're comfortable with where we put that guidance.

Speaker 4

Erica, this is Steve. Remember, the guidance cycle and we've been well below the through the cycle average. And at this point, we're guiding to now for a dozen years. We've been very disciplined, rich in team, along with the lending teams that have Adhere to the disciplines, didn't open up in some of the areas that might have been frothy And recent vintages. So we've got a really good core book on both the commercial side.

Speaker 4

And as a super prime and secured lender, generally, on the consumer side, we actually think of that as a lower risk book. So Our aggregate moderate to low risk profile and discipline over many years will serve us well, certainly in auto And frankly, the entire portfolio.

Speaker 8

Thank you for that. And my second question is On that 6% to 9% PPNR growth medium term target, clearly you expect to hit that this year. And I'm wondering, obviously, it gets more difficult if the Fed is cutting, which a lot of investors expect for 2024. And maybe the question is, I know we'll hear more from you on this expense management actions that you're taking for which you will incur a restructuring charge, but is that an example of the commitment that Huntington has to deliver this PPNR growth range with consistency over the medium term on an annual basis, even if the revenue Tailwinds dissipate like rates.

Speaker 4

Erica, this is Zach. I'll take that one. And the answer to your question is yes. We in terms of that very much is a sign of our trying to look ahead, not only 2023, but also over the entirety of the strategic plan in Horizon and ensure that we're setting up the overall financial performance in terms of revenue And the growth rate of overall expenses such that we can achieve the objectives in terms of profit growth. That is a very deeply held objective, and We're not looking at the short term, but at the long term to achieve it.

Speaker 4

As we talked about a fair amount at Investor Day, there are multiple strategic levers that we use to be able to manage overall expenses to grow less than revenue to support that PPNR Even as we drive a faster growth rate of the expenses sorry, the investments within expenses to drive Ultimately, business for the long term, but the efficiency drivers operation accelerate that's going in reengineering major Our long track record of optimizing the consumer and retail branch distribution network, which is Still very relevant, still really matters, but it does represent an opportunity over time to reduce and to harvest expense saves and things like this organizational alignment, which are designed to help us to improve efficiency and hold cost growth At a low level, I will note it's in the guidance that I've given in terms of overall core expense growth for 2023, but importantly also Helps us to achieve our strategic objectives, align our organization yet even more toward our most important Extremely focused on driving that long term efficiency program, which is an important component of the PPNR guide. I do respect we'll achieve the financial medium term targets this year. That's what's baked into and implied by our overall guidance.

Speaker 4

Eric, it's Steve. If I could add on just a bit, as you'll remember from the Investor Day, Zach shared a number of economic scenarios. And we were asked a question and commented that we would take action if the scenarios The economy worsened and the more challenging scenario emerged. We've already closed term financial goals. We're looking ahead as well to 2024 with how we're positioning the reinvestment So, team is doing a great job.

Speaker 4

It's a quick pivot, if you will, from a record year and record quarter, But it's with a very clear set of actions and plan that we're executing.

Operator

The next question is from the line of

Speaker 9

Just a follow-up on Erika's first question. You guys talked about your buyback being on pause because you're watching the path The economy in the first half, you talked a little bit about the economic outlook since the Investor Day was slightly worse. Yet, Rich, you sound pretty confident. It It feels like you feel good about your credit outlook. Just help us square that a little bit more.

Speaker 9

Are you actually seeing erosion maybe outside of your portfolios or Help us understand your overall thinking because it seems like it's pretty positive from my view.

Speaker 4

Well, I would say it's positive right now and we're certainly cautious as we enter

Speaker 5

a downturn.

Speaker 4

But everything that I'm looking Just as we enter a downturn, but everything that I'm looking at right now, John, is holding water exactly where We thought it would be our delinquencies, both in commercial and consumer are right where we would expect them to be. We had a very Sharp drop in our commercial delinquencies and our commercial real estate delinquencies are essentially nothing. The current class momentum And NPA momentum that we've got both down 20% year over year puts us in really good stead as we enter a downturn. So we're looking at everything. Every portfolio we're Going deep into to make sure that we're proactive in identifying potential issues and trying to get ahead of them in terms of working with customers As there's potential problems, but certainly, the headwinds are there in the economy, but we feel good in 'twenty three than we had in 'twenty two.

Speaker 4

So we understand that's going to be a more challenging environment, but we feel good where we're sitting.

Speaker 9

Okay. And then can you guys touch on the one feline that stood out was Capital Markets. Can you touch on what you're seeing there? You talked about KapStone and then some of your other businesses. Are these referrals coming to KapStone internally?

Speaker 9

Is it business generated on their own? And what do you think there in terms of the longer term runway? Thanks.

Speaker 4

In terms of so this is Zach. This is Jon. I'll take that one. Capital Markets is a real bright spot for us. The core underlying capital markets, excluding KapStone, grew 26% revenue year over year in 2022, and we expect another run rate Of double digit, teens are above revenue growth as we go into 'twenty three.

Speaker 4

So we're seeing just really sustained traction and The underlying strategy there is to deepen relationships with additional clients, continue to penetrate that set of services and products into our core customer base and reap the benefits of it. It's been an area, as you know, that we've been investing considerably over time, and we're seeing that play through into incremental revenue growth. And then Capstone, to your point, is a nice addition to that. And I would tell you that Capstone is doing really, really well. They beat the plan for Q3.

Speaker 4

It's overall more than the $100,000,000 run rate if you look at the back half of revenues, if you look at the Back out of 'twenty two and we expect that to continue and sustain and continue to grow as we go into 'twenty three. It's Early days, I would say, in getting client referrals from the Huntington base. But at the beginning, we are seeing, particularly as it relates Pipeline in the future, a lot of positive engagement of core Huntington clients with the Capstone team and with the service out there. And so it's going to be an area that just continues to bear fruit, and we're quite bullish about the opportunity to grow Capstone's what was previously $100,000,000 revenue run rate up into something that continues to perform well and So it's definitely a strong point at this point. I'll add to that a little bit, John, Thank you, Ken.

Speaker 4

So Capstone's had a good performance thus far. They have a very strong pipeline coming into the year. Obviously, multiples But we're really pleased with that. The integration into the bank channels is going very, very well. The core businesses, Foreign exchange record year, institutional sales and trading, commodities has had very good performance.

Speaker 4

So a number of the businesses are doing very, very well at the core and expect They'll continue. So the laggard is, as you would expect, the rates businesses, given And the integration of both Capstone and the combined efforts of our core teams and what you heard at

Operator

The next question is from the line of Scott Siefers with Piper Sandler. Please proceed with your question.

Speaker 7

Good morning, guys. Hey. Just wanted to ask one back on credit. Just sort of in light of your updated economic assumptions, what sort of reserving needs do you think Huntington might have? I mean, you're already starting with 190 plus reserve here.

Speaker 7

So I mean, does that That seems sufficient in light of what you're thinking or would it continue to drift upward a bit?

Speaker 4

Scott, it's Rich. I'll take that. So as you So we held our coverage levels flat in the second quarter and then we had 2 incremental builds in Q3 and Q4. So the 190 coverage that we're sitting with today, we think is fully reflective of the current economic scenario. Where the reserve goes from there is really going to be a function in the short term of where the economy is heading.

Speaker 4

If We see significant degradation, we'll have to react to that or if it isn't as bad, we'll react there. It's hard to answer it. We go through that process every quarter in terms of looking at the economic scenario that's in front of us and what The potential for improvement or degradation is, and we make the call at the end of the quarter based on all that. The near term is really going to depend on where the economy shakes out. I would say that longer term as we get past the

Speaker 5

downturn, however long it might

Speaker 4

be, we do think that we will bring that We do think that we will bring that reserve coverage down over time. It's just a question of the timing around And the year end reserve stat reflects this adjusted thinking in terms of the baseline economic scenario with a softening economy Yes.

Speaker 7

Okay. Perfect. Thank you. And then, Zach, sort of a piggyback question. Just the expense guidance I'm presuming that includes the restructuring charges to which you alluded earlier.

Speaker 7

I know you said you'd talk in More detail about those later, but do you have maybe an approximate level of what we might expect just to get a sense for what sort of underlying Expense growth might look like from here on out.

Speaker 4

Yes. Thanks, Scott, for asking the question. I want to take the opportunity to clarify. The guidance I've given is 2% to 4% growth in underlying core. And then on top of that, the run rate for Capstone Toronto, which is around We have not yet fully sized the potential restructuring costs from the Organizational alignment actions that Steve mentioned, so that is yet to be included in that guidance, just to be to put a very specific point on that.

Speaker 4

And then I don't expect it to be overly large, but we'll have to see ultimately it will be a function of a number of factors, The final nature of the changes. And importantly, as Steve noted, we're instituting a voluntary retirement program, which, By its very name, it has a function of employee selection and take up on their own. So there will be some degree of variability until we have So that more to come on that. There's a few opportunities during the Q1 for us to provide additional updates around The nature of the program and the sizing around it, we intend to do that as we get further out into Q1.

Speaker 7

Perfect. Okay. I appreciate or presentation.

Speaker 4

There's some pickup on that expense, that one time expense that We would expect to see just in the run rate in 'twenty three, and there may be other things we can do to absorb that Also not the forecast.

Speaker 7

Okay, perfect. Thank you all very much.

Speaker 5

Our next

Operator

question comes from the line of Matt O'Connor with Deutsche Bank. Please proceed with your question.

Speaker 10

Good morning. I just wanted to push on the buybacks. You've got Almost 9.5% CET1 capital. You've got very strong reserves. You've got very strong capital generation, Solid loan growth, but not going to consume a ton of capital.

Speaker 10

I seem pretty confident on credit. So I guess I'm just trying to better And why you wouldn't buy back stock in the first half? And then just to kind of throw it out there, it feels like the uncertainty might increase as we look to the back half. So what would make you kind of more confident to buy back in the second half heading into maybe more macro uncertainty?

Speaker 4

Yes, Matt, it's a good question. I think just taking a step back and Rob, you'll frame it. The expectation now as we get out over the course of The totality of 'twenty three and certainly as we think about 'twenty four and beyond to get back to a more normal mix overall payout ratios And so I think you could see this Buyback is really just the program with the repurchase program as being indicative of that part of that and I think it's a really healthy We thought a little more tactically zooming in into the near term, we just Really want to see the depth of the economic environment during the course of 'twenty three before we make any substantive or significant commitments. And I think Hopefully, the logic of that is understood. How long exactly does it take to get clarity?

Speaker 4

To your point is Somewhat uncertain. I suspect we'll know a bit more over the course of Q1 and as we get into Q2. If it's more resolved at that point, then I think we'd be more active and still highly uncertain. We'll have to see and be dynamic. But generally speaking, the size of the program was designed to keep us in the middle of our CET1 operating range over the course of Of the proceeding period.

Speaker 4

And so that will be our plan to generally manage in that way, ideally, with a

Speaker 9

bit more clarity in the near term.

Speaker 10

Okay. And then, as we think about potential uses of the capital besides buybacks, just remind us your appetite For old phone deals and I guess specifically within fees, right, because we kind of step back right now in net interest income. Maybe it's not peaking, but it's probably not going to be a key driver of growth as we get through this year and beyond. And I know you guys have been talking about kind of better balancing some of that fee mix over time. So what's the appetite to do something whether it's small or maybe bigger than you've done in the past?

Speaker 10

Thank you.

Speaker 4

Matt, it's Steve. We are interested in building our fee income opportunities and that revenue stream. And so if we can find things that we think make sense that would enhance our current business lines And or what we call return customers would be interested. Just as last year, we were fortunate to get We'll be looking as the year progresses, whether it makes sense to bolster the acquisition on the fee side of our businesses. But that's not sort of an intended set aside On that buyback and promotions that are just related, our capital priorities haven't changed.

Speaker 10

Okay. Thank you very much.

Operator

Thank you. At this time, we've reached the end of the question and answer session. I will now And the floor back to Mr. Steinauer for closing remarks.

Speaker 2

So thank you very much for

Speaker 4

joining us today. As you know, we're very pleased with the record year for Huntington and 3rd straight quarter of record net income, 4th straight quarter of PP and Hydro. We committed this year with a lot of momentum. We think we're well positioned to manage through a mild recession, and we remain committed to and confident of our ability to continue creating value for shareholders. And as a reminder, the Board, executives, our colleagues are a top 10 shareholder collectively, reflecting our strong alignment

Operator

You may disconnect at this time. And thank you for your participation.